SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
------------------
For Quarter Ended June 30, 2001
Commission File No. 0-08536
REGENT ENERGY CORPORATION
(Exact name of registrant as specified in charter)
Nevada 84-1034362
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
650 North Sam Houston Parkway E., Suite 500
Houston, Texas 77060
(Address of principal (Postal Code)
executive offices)
Registrant's telephone number, including area code: (281) 931-3800
NPC Holdings, Inc.
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
As of July 31, 2001, there were 17,034,923 shares of the common stock, $0.001
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (check one)
YES NO X
---- ----
REGENT ENERGY CORPORATION
June 30, 2001
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheet .....................................................1
June 30, 2001 (Unaudited) and December 31, 2000
Condensed Consolidated Statement of Operations (Unaudited) ...............................2
Three Months and Six Months Ended June 30, 2001 and 2000
Condensed Consolidated Statement of Cash Flows (Unaudited)................................3
Six Months Ended June 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements......................................4
Item 2. Management's Discussion and Analysis and Plan of Operation ...............................7
PART II. OTHER INFORMATION 16
SIGNATURES..................................................................................................17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
REGENT ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2001 2000
--------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,023 $ 45,075
Accounts receivable:
Trade - production 424,270 988,680
Amounts due from working interest owners 2,407,389 1,695,460
Officers and stockholders 66,753 36,650
Other 183,592 50,410
Other current assets 271,451 300,374
--------------- ---------------
Total current assets 3,358,478 3,116,649
PROPERTY AND EQUIPMENT (full cost method for oil and gas
properties), net of accumulated depletion, depreciation and
amortization of $1,345,653 and $517,205 in 2001 and 2000 16,618,333 16,476,774
UNREALIZED GAIN ON DERIVATIVE INSTRUMENTS 426,764 -
OTHER ASSETS 356,102 255,274
--------------- ---------------
Total assets $20,759,677 $ 19,848,697
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 87,523 $ 287,521
Current portion of long-term debt 5,994,553 6,855,145
Accounts payable:
Trade 1,452,392 1,575,348
Related parties and investors 517,500 647,700
Accrued liabilities 753,698 658,146
Royalties and revenues payable 405,158 196,405
--------------- ---------------
Total current liabilities 9,210,824 10,220,265
LONG-TERM DEBT, less current portion 2,744,376 3,237,214
CONVERTIBLE DEBT, net of discounts of $898,799 1,951,201 -
GAS IMBALANCE LIABILITY 1,472,687 1,523,356
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 100,000,000 shares authorized;
16,833,923 and 14,288,543 shares issued and outstanding at
2001 and 2000 16,834 14,289
Additional paid-in capital 17,142,009 14,423,099
Accumulated deficit (11,778,254) (9,569,526)
--------------- ---------------
Total stockholders' equity 5,380,589 4,867,862
--------------- ---------------
Total liabilities and stockholders' equity $20,759,677 $ 19,848,697
=============== ===============
See accompanying notes to these condensed financial statements.
1
REGENT ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
-------------- -- --------------- -------------- --- --------------
(unaudited) (unaudited)
OIL AND GAS REVENUES $1,337,934 $ 183,867 $3,169,150 $ 405,386
COST AND EXPENSES:
Lease operating expenses 962,710 182,975 1,614,972 390,822
Severance taxes 13,698 17,007 35,308 30,139
Depletion, depreciation and amortization 380,031 44,664 828,448 90,273
General and administrative 1,441,696 761,220 1,884,813 1,399,015
-------------- --------------- -------------- --------------
Total cost and expenses 2,798,135 1,005,866 4,363,541 1,910,249
INCOME (LOSS) FROM OPERATIONS (1,460,201) (821,999) (1,194,391) (1,504,863)
OTHER INCOME (EXPENSE):
Interest Income
526 - 1,302 -
Interest expense and financing costs, of (1,269,028) (112,063) (1,487,908) (146,838)
which $423,418 is non-cash in the second
quarter
Unrealized gain on derivative instrument 475,159 - 312,193 -
Other 18,203 30,500 45,505 55,323
-------------- --------------- -------------- --------------
Total other income (expense) (775,140) (81,563) (1,128,908) (91,515)
LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (2,235,341) (903,562) (2,323,299) (1,596,378)
Cumulative effect of accounting change - - 114,571 -
-------------- --------------- -------------- --------------
NET LOSS $(2,235,341) $ (903,562) $(2,208,728) $(1,596,378)
============== =============== ============== ==============
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE:
Loss before cumulative effect of
accounting change $ (0.133) $ (0.091) $ (0.147) $ (0.186)
Cumulative effect of accounting change - - $ 0.007 -
Net income $ (0.133) $ (0.091) $ (0.140) $ (0.186)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Primary and fully diluted 16,828,951 9,946,662 15,832,911 8,566,445
============== =============== ============== ==============
See accompanying notes to these condensed financial statements.
2
REGENT ENERGY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months
Ended June 30,
2001 2000
------------ --- ------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,208,728) $(1,596,378)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation, depletion and amortization 828,448 90,273
Gas imbalance make-up (50,669) -
Stock-based compensation 85,410 -
Financing costs 423,418 -
Unrealized gain from derivative instruments (312,193) -
Cumulative effect of accounting change (114,571)
Changes in assets and liabilities:
(Increase) decrease in:
Trade and other receivables and amounts (310,804) (1,690,025)
due from investors
Other current assets 28,923 3,767
Other assets 119,172 (295,446)
Increase (decrease) in:
Accounts payable - trade and related parties (253,156) 258,396
Other current liabilities 304,306 268,464
Other, net - -
------------ -----------
Net cash used in operating activities (1,460,444) (2,960,949)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to oil and gas properties (970,007) (2,900,096)
Other - 25,000
----------- ------------
Net cash used in investing activities (970,007) (2,875,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term notes payable - 1,500,000
Repayments of short-term notes payable (199,998) (510,044)
Proceeds from long-term debt 175,000 2,500,000
Repayments of long-term debt (1,528,430) -
Redemption of common stock (50,000) (150,000)
Proceeds from convertible debt, net of expenses 2,630,000 -
Proceeds from exercise of warrants 387,378 -
Proceeds from sale of common stock, net of 976,449 2,379,045
offering costs of $290,002 ----------- -----------
Net cash provided by financing activities 2,390,399 5,719,001
DECREASE IN CASH AND CASH EQUIVALENTS (40,052) (117,044)
CASH AND CASH EQUIVALENTS, beginning of period 45,075 241,573
CASH AND CASH EQUIVALENTS, end of period $ $ 124,529
See accompanying notes to these condensed financial statements.
3
REGENT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENT
1. LINE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURES
The condensed financial statements as of June 30, 2001 and for the three
month and the six month periods then ended included herein have been prepared by
Regent Energy Corporation, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, Regent believes that the
disclosures are adequate to make the information presented not misleading. In
Regent's opinion, the financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly its financial
position and the results of its operations and its cash flows for the dates and
periods presented in accordance with generally accepted accounting principals in
the United States of America. The results of the operations for these interim
periods are not necessarily indicative of the results for the full year.
The Company adopted FASB 133 entitled "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 2001. As of January 1, 2001,
the Company had both oil and gas swap contracts that had a net fair value of
$114,571. This gain was reflected as a change in accounting principle in the
accompanying financial statements. The Company has not fulfilled the
documentation requirements of FASB 133 to designate these contracts as hedging
activities. As a result, the change in the fair value of these contracts of
$162,966 during the first quarter was charged to income and the change in the
fair value of these contracts of $475,159 during the second quarter was credited
to income. During July 2001, the Company's gas swap contract was terminated.
These financial statements and notes thereto should be read in conjunction
with the Company's report on Form 8-K/A financial statements for the year ended
December 31, 2000 filed on June 6, 2001.
4
2. LONG-TERM DEBT
The following is a summary of long-term debt at June 30, 2001 and December
31, 2000:
June 30, December 31,
2001 2000
---------------- ----------------
$6,000,000 note payable to bank generally due in $ 4,600,000 $ 5,830,000
monthly payments of $175,000 plus interest at Bank
One's prime rate plus 1% (7.75% at June 30, 2001)
through September 2003.
$1,700,000 note payable to a financial institution due 1,700,000
in monthly installments of $58,893, including 1,483,959
interest at 14% through October 2003.
$2,500,000 note payable to a company due in monthly 2,500,000
payments of $70,000 with interest at 18%, beginning 2,430,000
May 1, 2001
Various notes payable to acquire vehicles due in 40,457 47,131
monthly installments of $372 to $497 with interest
rates ranging from 3.9% to 6.9%; collateralized by
vehicles.
Unsecured installment note payable to a stockholder 9,153 15,228
due in 45 monthly installments of $946, including
interest at 9% with a final maturity date of April
1, 2002.
$175,000 note payable to an individual due in full 175,000 -
upon maturity at June 8, 2003. Interest accrues and
is paid quarterly at a rate of 10%.
---------------- ----------------
Total 8,738,929 10,092,359
Less current portion (5,994,553) (6,855,145)
---------------- --------------
$ 2,744,376 $3,237,214
================ ================
The $6,000,000 note payable to a bank is collateralized by oil and gas
properties with a borrowing base of $6,000,000 on the date the loan was funded.
The borrowing base is reduced by $175,000 each month and is generally subject to
redetermination semi-annually. At June 30, 2001 the borrowing base was
$4,600,000. If at any time the outstanding balance of the note exceeds the
borrowing base, the Company must either pay down the note to the amount of the
borrowing base and/or provide additional collateral. In addition to interest on
the note, the Company pays a facility fee on a quarterly basis equal to 1/2% of
the unused commitment under the agreement, which as of June 30, 2001 was zero.
The note agreement includes various covenants, the most significant of which are
to maintain a ratio of current assets to current liabilities, excluding current
maturities of long-term debt, of not less than 1.0 to 1.0 and to maintain a debt
coverage ratio, as defined, of not less than 1.0 to 1.0. The Company was in
violation of these covenants at June 30, 2001. This violation gives the bank the
right to accelerate the full amount due under the note. Therefore, all amounts
due this bank are included in current liabilities.
The $1,700,000 note to a financial institution is subordinate to the
$6,000,000 bank note and is collateralized by an assignment of proceeds from the
sale of oil and gas from certain oil and gas properties. The note agreement
includes various covenants, the most significant of which require the Company to
5
maintain a ratio of current assets to current liabilities of not less than 1.0
to 1.0 and a debt coverage ratio where EBITDA to interest will not be less than
1.1 to 1.0. The Company was in violation of the debt coverage covenant at June
30, 2001. The Company received a waiver of such violation through June 30, 2002.
The $2.5 million demand note to a company was renegotiated in March
2001 to provide for interest only payments through April 30, 2001 computed based
on a rate of 18% for January 2001, and 12% from February 1, 2001 through April
30, 2001. Under the terms of the note, the interest rate reverted to 18% as of
May 1, 2001, and as provided under the terms of the note, the Company is
repaying the note in 35 monthly installments of $70,000 plus interest with a
final installment of the remaining balance due in the 36th month. This note is
subordinate to the $6,000,000 note to the bank, is partially collateralized by
oil and gas properties, and is guaranteed by the Company's president. Under the
terms of an agreement with this lender, this lender is entitled to an assignment
of 10% of the Company's net cash flows/property, after deduction for debt and
interest payments, on related debt, of any oil and gas properties the Company
may acquire from January 4, 2000 through December 31, 2002 from certain
companies. As of June 30, 2001, one property has been acquired to which the 10%
provision applies. Payments under this provision were minor in the first and
second quarter of 2001.
Scheduled maturities of long-term debt are as follows:
Years ending December 31,
-------------------------
2001 $4,239,697
2002 2,476,942
2003 1,679,900
2004 337,200
2005 5,190
$8,738,929
3. CONVERTIBLE DEBT
During the second quarter the Company issued convertible notes of
$2,850,000. The notes are for a two-year period and require interest only
payments on a quarterly basis at rates ranging from 6% to 9%. During the
two-year period the notes can be converted to common stock of the Company at any
time at the option of the payee at prices ranging from $2.50 to $3.25 per share.
However, the Company has the right to force conversion of the notes into equity
when the Company stock price averages $5.00 per share or above for a period of
more than sixty days. The notes can be converted into a total of 958,461.54
shares of the Company's common stock. Conversion costs of $330,346 and
commission expense of $27,501 was recognized during the second quarter. The
conversion costs reflect the amount by which the fair value of the Company's
common stock exceeded the conversion price on the date of funding. The notes
were immediately convertible. As a result, the entire $330,346 was expensed at
funding.
Detachable stock warrants were issued to the payees of the convertible
notes. A total of 329,500 warrants were issued at an exercise price of $1.00 per
share. The fair value of the warrants was determined to be $991,871 using the
Black Scholes Option Pricing with the following assumptions: interest rate 5%;
volatility 266%; dividend rate 0%. Through the end of the second quarter 222,000
warrants had been exercised. In the second quarter deferred financing cost of
$991,871 was recorded as a reduction to the carrying value of the convertible
notes, of which $93,072 was amortized through June 30, 2001. The financing costs
are being amortized on the interest method over the term of the notes.
During July 2001 the Company issued additional convertible notes totaling
$1,575,000. The notes are for a two-year period and require interest only
payments on a quarterly basis at a 10% rate. During the two-year period, the
notes can be converted into common stock of the Company at $3.50 per share, for
a total of 450,000 shares. These notes were issued with 189,000 warrants at a
price of $1.50 each. The Company estimates that the issuance of these notes and
warrants will increase third quarter expense by $140,000 as follows: interest
expense $33,000, commissions $20,000, warrants $48,000, and conversion expense
of $39,000.
6
4. STOCKHOLDERS' EQUITY
Stockholders' equity increased by a net of $512,727 for the first six
months of 2001, with 2,545,380 shares of common stock having been issued during
that period. During that period 1,212,820 of the 2,545,380 shares were deemed
issued to NPC shareholders as a result of the share exchange between NPC
Holdings, Inc. (now Regent) and Playa Minerals & Energy, Inc. (now Vulcan) in
accordance with the Agreement and Plan of Reorganization dated March 9, 2001.
Sales of stock during the period totaled 481,173 shares at an average price of
$2.68 per share for a total of $1,286,451, less offering costs of $290,002. In
addition, 893,149 stock warrants were exercised for a like number of shares for
which the Company received a total of $387,378. During the period 41,762 shares
were redeemed at a cost to the Company of $70,000.
As discussed in Note 3 above, stockholders' equity increased by $991,872 as
a result of the issuance of 329,500 warrants and increased by an additional
$330,346 due to conversion costs, both as a result of the issuance of
convertible notes. The conversion costs charged to the Company reflect the
amount by which the fair value of the Company's common stock exceeded the
conversion price on the date of funding.
Stock based compensation cost increased stockholders' equity by $85,410
while the net loss of $2,208,728 that was recognized for the six-month period
decreased stockholders' equity.
5. ACQUISITIONS AND NEW VENTURES
During March 2001, the Company made a formal offer to buy back the 58.5%
working interests on the New Mexico properties (Horseshoe Gallup Unit and
Northeast Hogback Field). The terms are generally that the Company will reduce
the amount of the notes receivable from each owners and the amount of the
outstanding accounts receivable for lease operating expense. The balance would
be paid in cash. As of July 31, 2001, investors holding almost all of these
working interests have signed a term sheet indicating their intention to sell
their interests to the Company. We expect to finalize the transaction by the end
of the third quarter.
On August 10, 2001 the Company executed a Purchase and Sale Agreement with
Henry Production Company for the purchase of Henry's interest in the Deep Lake
Field in offshore Cameron Parish, Louisiana for $25,000,000. Under the Purchase
and Sale Agreement, the Company is committed to make a performance deposit in
the amount of $1,250,000. If the Company fails to close the transaction by
September 5, 2001, subject to a 15 business day extension at the option of the
Company if the Company is in substantial compliance with the agreement, subject
to satisfactory due diligence and subject to seller's breach, the Company will
forfeit the $1,250,000 performance deposit. The interests being purchased are on
state leases and include 100% working interest (72% net revenue interest) in six
wells. These wells currently produce approximately 300 barrels of condensate and
8 mmcf of natural gas per day. Closing is anticipated to occur in early
September 2001. Regent will be operator of these properties.
On August 9, 2001 the Company executed a preliminary agreement with
Millennium Energy Ventures (MEVCO) to develop an electric plant with 500
megawatt generating capacity on the Horseshoe Gallup Field in San Juan County,
New Mexico, subject to other agreements which remain to be negotiated. Ownership
of the project will be 75% Regent and 25% MEVCO and the estimated costs are
$250,000,000. MEVCO will manage the permitting and construction process and
arrange for financing of the project. Regent will be prepared to give up 50%
(total) of its 75% net for the financing, netting a 25% interest after
financing. The terms of the Agreement also provide that MEVCO will assist Regent
in the acquisition of several gas fields in the Four Corners area totaling an
estimated 90+ Bcf of proved natural gas reserves and 20 mmcfd current
production. Either party can terminate this preliminary agreement on 30 days
notice.
7
Item 2. Management's Discussion and Analysis of Plan of Operation.
GENERAL
The first quarter of 2001 brought many changes for Regent Energy
Corporation ("Regent" or the "Company"). On March 9, shareholders approved a
transaction with NPC Holdings in which each share of Vulcan Minerals & Energy
common stock became the right to approximately three shares of NPC Holdings,
which had changed its name on this same day to Regent Energy Corporation. As a
result of this transaction, Vulcan became a wholly-owned subsidiary of NPC (now
Regent), a publicly traded company. Our stock is now traded on the OTC bulletin
board under the symbol RGEY.
In June 1999 we purchased the Horseshoe Gallup Unit and the Northeast
Hogback Field (the New Mexico properties) for $1.2 million. We subsequently sold
58.5% of the interest to other parties. These fields consist of 26,000 acres in
the Four Corners Area of San Juan County, New Mexico. Since the time these
properties were acquired, production has increased to approximately 280 bopd of
oil from 116 wells, up from only 50 bopd oil from 11 wells. The Company is the
operator of these properties.
During March 2001, the Company made a formal offer to buy back the 58.5%
working interests discussed above. The terms are generally that the Company will
reduce the amount offered on the working interests by the amount of the notes
receivable from each owner and the amount of the outstanding accounts receivable
for lease operating expense. The balance would be paid in cash. As of July 31,
2001, investors holding almost all of these working interests have signed a term
sheet indicating their intention to sell their interests to the Company. We
expect to finalize the transaction in the third quarter.
On November 14, 2000, the Company acquired interests in certain producing
properties in the Gulf of Mexico from Marathon Oil Company, (the "Marathon
acquisition") for $11,528,000. The Marathon acquisition included property
interests in West Delta Blocks 79, 80, 85 and 86 and Vermilion Blocks 314 and
331 offshore Louisiana. When purchased, the Company assumed a gas imbalance
liability of $1,523,356. As of June 30, 2001, this liability was reduced by
$50,669 due to make-up adjustments by under-produced parties and price
corrections as compared to first quarter estimates. The gas balancing agreement
allows for under-produced parties to take no more than 38% of the overproduced
party's share in any one month in order to achieve a balanced position. These
properties are subject to an assignment of 10% of the Company's cash
flow/property after deduction for debt and interest payments to Parawon
Corporation and a portion of the production is committed to certain swap
agreements as discussed below. Amerada Hess is the operator of these properties.
Our plan is to grow the Company aggressively through the acquisition of oil
and gas properties with proved reserves. We are currently evaluating and/or
negotiating several such opportunities which would have a significant impact on
the Company if consummated. We are also accelerating the development of our
proved non-producing reserves which will result in increased cash flow and the
reclassification of reserves to the proved developed producing category.
Since engaging in this strategy, five inactive wells have been restored to
production at West Delta 79 (Marathon acquisition). The Company's net production
increase at the field was 315 Mcf per day and 105 Bbls per day as a result of
this initial workover program at a net cost to the Company of approximately
$85,000. Five second quarter workovers in the New Mexico properties have
resulted in an estimated 50 Bbls per day net production increase at a cost to
the Company of approximately $69,000. The Company plans to complete two of these
type workovers per month on the New Mexico properties and one per month on the
Marathon acquisition properties. Additionally, in the fourth quarter the Company
intends to spud the first well in a six well developmental drilling program on
New Mexico properties. We expect to spend $1,870,000 on drilling and completion
work on the New Mexico and Gulf of Mexico properties in the second half of the
year.
The Company is also looking at other opportunities outside our core oil and
gas production activities. During the second quarter the Company entered into an
exclusive agreement with BORS International, L.L.C. to sell and distribute BORS
(Balanced Oil Recovery Systems) Lift Units in Indonesia. The agreement requires
8
that the Company sell the units for not less than $23,500 USD each, from which
BORS International will be paid $17,500 USD. The Company will assume all
shipping and transportation costs from the BORS production facility in Tulsa,
Oklahoma. Our experience with the set up and operation of these units on the New
Mexico properties gives us a unique ability to exploit this new opportunity.
On June 7, 2001 the Company received an order for 400 units from P.T.
Sistekon, a wholly owned subsidiary of Pertamina, the state owned oil company of
Indonesia. The units are priced at $27,500 each, for a total order amount of $11
million USD. The units will be shipped in five phases over the next 15 months
with delivery of the first 10 units projected on September 15, 2001 and the last
100 units projected on January 15, 2003. Payment terms are for P.T. Sistekon to
make payment directly to BORS International 30 days after the units are received
FOB Jakarta. BORS will then remit commissions to the Company. The Company's only
exposure will be the shipping and transportation cost FOB Jakarta, estimated at
$2,000 per unit. P.T. Sistekon has secured this order with BORS International
through the placement of a $11 million USD letter of credit drawn on a US bank.
The Company estimates net earnings of $3.2 million on this order. Per GAAP
the income will be recognized as the units are shipped over the next 15 months.
The projected shipping schedule is as follows:
Shipping Estimated
Date Units Earnings
------------------------ -------------- ---------------
Sept. 15, 2001 10 $ 80,000
Jan. 15, 2002 90 $ 720,000
May 15, 2002 100 $ 800,000
Sept. 15, 2002 100 $ 800,000
Jan. 15, 2003 100 $ 800,000
-------------- ---------------
400 $ 3,200,000
============== ===============
9
RESULTS OF OPERATIONS
The following table summarizes certain financial data, non-GAAP financial
data, production volumes, average realized prices and average expenses for the
Company's oil and natural gas operations for the periods shown:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
----------------------------- ------------------------------
FINANCIAL DATA (IN THOUSANDS):
Revenues:
Oil and condensate $1,052,027 $ 183,867 $ 2,146,841 $ 405,386
Natural gas 285,907 - 1,022,309 -
----------
Total revenues $1,337,934 $ 183,867 $ 3,169,150 $ 405,386
Net cash used by operating activities (1,537,766) (2,169,231) (1,460,444) (2,960,949)
Net cash used by investing activities (833,230) (2,059,935) (970,007) (2,875,096)
Net cash provided by financing activities 2,300,475 4,217,131 2,390,399 5,719,001
NON-GAAP FINANCIAL DATA:
EBITDA (a) $ (890,118) $ (746,833) $ (169,824) $(1,359,267)
AVERAGE DAILY PRODUCTION VOLUMES:
Oil and condensate (Bbls/day) 479 81 465 83
Natural gas (Mcf/day) 619 - 1,200 -
Total (Boe/day) 582 81 665 83
PRODUCTION VOLUMES:
Oil and condensate (Bbls) 43,555 7,335 84,138 14,983
Natural gas (Mcf) 56,339 - 217,270 -
Total Boe 52,945 7,335 120,350 14,983
AVERAGE REALIZED PRICES : (b)
Oil and condensate (per Bbl) $24.15 $25.07 $25.52 $27.06
Natural gas (per Mcf) $5.07 - $4.71 -
EXPENSES (PER BOE)
Lease operating $18.18 $24.95 $13.42 $26.08
Production and severance taxes .26 2.32 .29 2.01
Depreciation, depletion and amortization 7.18 6.09 6.88 6.02
General and administration 27.23 103.78 15.66 93.37
(a) EBITDA represents earnings before stock compensation and financing
expense, unrealized gain or losses on derivative instruments, gas
imbalance make-up revenues, interest expense, income taxes,
depreciation, depletion and amortization. The Company believes that
EBITDA may provide additional information about the Company's ability
to meet its future requirements for debt service, capital expenditures
and working capital. EBITDA is a financial measure commonly used in
the oil and gas industry and should not be considered in isolation or
as a substitute for net income, operating income, net cash provided by
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles
or as a measure of a company's profitability or liquidity. Because
EBITDA excludes some, but not all, items that affect net income and
may vary among companies, the EBITDA calculation presented above may
not be comparable to similarly titled measures of other companies.
10
(b) Reflects the actual realized prices received by the Company, including
the results of the Company's commodity swap and gas balancing
agreements.
During the second quarter the Company recognized the effect of four
significant events that had a combined $1.7 million negative impact on the
quarter's income. They were:
o $561,000 increase in LOE expense. Amerada Hess, the operator of the
offshore properties, significantly increased lease operating expense
to bring the properties up to Minerals Management Service compliance.
o $451,000 in financing costs associated with the issuance of $2,850,000
in convertible notes.
o $428,000 increase in legal, professional and accounting costs due to
the initial SEC filings.
o $282,000 in other miscellaneous non-recurring items.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
All significant increases in revenue, production volumes, lease operating
expenses and DD&A as discussed below are a result of the addition of the
Marathon properties.
Oil and natural gas revenues increased from $.2 million in second quarter
of 2000 to $1.3 million in second quarter of 2001, an increase of $1.1 million,
or 550%. Production volumes for oil and condensate increased from 7,335 Bbls in
the second quarter of 2000 to 43,555 Bbls in the second quarter of 2001, an
increase of 36,220 Bbls, or 494%. Production volumes for natural gas increased
from zero in the second quarter of 2000 to 56,339 Mcf in the second quarter of
2001. The increase in total production increased revenues by $1.2 million. This
increase was partially offset by a 4% decrease in the average realized price
received for the Company's oil and condensate.
The Company realized an average oil price of $23.77 per Bbl and an average
gas price of $4.91 per Mcf during the second quarter of 2001. Net of commodity
swap results, the Company realized average prices of $24.15 per Bbl and $5.07
per Mcf. For the second quarter of 2000, the Company realized an average oil
price of $25.07 per Bbl, and had no natural gas production that period.
Lease operating expenses increased from $182,975 in the second quarter of
2000 to $962,710 in the second quarter of 2001, an increase of $779,735, or
426%. On a per Boe basis, lease operating expenses decreased from $24.95 in the
second quarter of 2000 to $18.18 in the second quarter of 2001, a decrease of
$6.77, or 27%. Lease operating expenses in the second quarter 2000 were 99% of
revenues, due to the necessity of restoring the recently purchased Horseshoe
Gallup and NE Hogback fields to a proper working condition.
Depreciation, depletion and amortization ("DD&A") expense increased from
$44,664 in the second quarter of 2000 to $380,031 in the second quarter of 2001,
an increase of $335,367, or 751%. This was the result of higher oil and gas
production volumes.
General and administrative expenses for the second quarter 2001 were
$1,441,696 as compared to $761,220 for the second quarter 2000, an increase of
$680,476 or 89%. This increase was primarily due to legal, accounting, and
consulting costs attributable to the SEC filings that occurred during the second
quarter of 2001, and higher salaries due to an increase in personnel as a result
of the Marathon and other anticipated acquisitions.
The Company incurred a net loss of $2,235,341 in the second quarter 2001 as
opposed to a loss of $903,562 in the second quarter of 2000 as a result of the
factors described above. The main contributors to the 2001 loss were the four
significant second quarter items discussed in the previous section. As mentioned
previously, no income was recognized through June 30, 2001 on the order for 400
BORS lift units.
11
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
All significant increases in revenue, production volumes, lease operating
expenses and DD&A as discussed below are a result of the addition of the
Marathon properties.
Oil and natural gas revenues increased from $.4 million in the first half
of 2000 to $3.2 million in the first half of 2001, an increase of $2.8 million,
or 682%. Production volumes for oil and condensate increased from 14,983 Bbls in
the first half of 2000 to 84,138 Bbls in the first half of 2001, an increase of
69,155 Bbls, or 462%. Production volumes for natural gas increased from zero in
the first half of 2000 to 217,270 Mcf in the first half of 2001. The increase in
total production increased revenues by $2.8 million. This increase was partially
offset by a 6% decrease in the average realized price received for the Company's
oil and condensate.
The Company realized an average oil price of $25.40 per Bbl and an average
gas price of $5.62 per Mcf during the first six months of fiscal 2001. Net of
commodity swap results, the Company realized average prices of $25.52 per Bbl
and $4.71 per Mcf. For the first six months of fiscal 2000, the Company realized
an average oil price of $27.06 per Bbl, and had no natural gas production that
period.
Lease operating expenses increased from $390,822 in the first half of 2000
to $1,614,972 in the first half of 2001, an increase of $1,224,150, or 313%. On
a per Boe basis, lease operating expenses decreased from $26.08 in the first
half of 2000 to $13.42 in the first half of 2001, a decrease of $12.66, or 49%.
Depreciation, depletion and amortization ("DD&A") expense increased from
$90,273 in the first half of 2000 to $828,448 in the first half of 2001, an
increase of $738,175, or 818%. This was the result of higher oil and gas
production volumes.
General and administrative expenses for the first half of 2001 were
$1,884,813 as compared to $1,399,015 for the first half of 2000, an increase of
$485,798 or 35%. This increase was primarily due to higher legal, consulting and
accounting costs in the second quarter.
The Company incurred a net loss of $2,208,728 for the first six months of
2001 as opposed to a loss of $1,596,378 for the first six months of 2000 as a
result of the factors described above. The main contributors to the 2001 loss
were the four significant second quarter items discussed in the previous
section.
MARKET RISK MANAGEMENT
Regent has entered into two separate swap agreements to limit its exposure
to fluctuations in commodity prices. The natural gas swap agreement is for
30,000 mbtu per month at a price of $4.775/mbtu for 2001, 20,000 mbtu per month
at a price of $4.11/mbtu for 2002. The oil swap agreement is for 10,500 barrels
per month at a price of $28.50/bbl for 2001, 9,500 barrels per month at a price
of $24.30 for 2002 and 6,000 barrels per day at a price of $22.29 for 2003. The
agreements account for 100% and 72% of production volumes for gas and oil
respectively for the second quarter 2001.
During the second quarter of 2001 the Company received approximately $9,360
on its natural gas swap contract and $16,905 on its oil swap contract. Based on
futures market prices at June 30, 2001, the Company would expect to receive
approximately $403,095 on the gas swap contract and receive approximately
$23,669 on the oil swap contract during the remainder of the contracts.
On July 2, 2001 the Company was notified by Bank One that they intended to
execute the "Early Termination" clause of the "Master Agreement" on the natural
gas swap contract. The amount due and payable by Bank One to the Company (the
"Early Termination Amount") is $329,212. Per the terms of the Credit Agreement
dated November 14, 2000 between Bank One and the Company, Bank One advised that
they would execute their option to set-off the Early Termination Amount against
the amount owing by the Company to them. All details associated with the
cancellation of this contract will be reflected in the third quarter financial
statement. The income effect associated with the cancellation is expected to be
minimal.
12
On July 24, 2001 the Company entered into a new swap agreement with Equiva
Trading Company for the sale of natural gas. The agreement provides for a floor
price of $2.75 per mmbtu on volume of 20,000 mmbtu per month for a period of 3
months (August through October). The cost to the company is $.17 per mmbtu.
There is no cost or penalty to the Company when prices are greater than $2.75
per mmbtu.
CAPITAL RESOURCES AND LIQUIDITY
In connection with our acquisition of the Marathon properties, in November
2000, we entered into a loan agreement with Bank One to provide us with a
secured reducing revolving credit facility of up to $25 million, subject to
borrowing base availability, for the acquisition and development of oil and gas
properties. The loan is secured by a mortgage on the properties acquired in the
Marathon acquisition and bears interest at the lender's prime rate of interest
plus 1.0%. We initially borrowed $6 million under the credit facility to close
our acquisition of the Marathon properties, however, such amount has been
amortized under the terms of the note at $175,000 per month with $4.6 million
outstanding at June 30, 2001. The initial borrowing base was $6.0 million and
under the terms of the agreement, has been reduced by $175,000 per month. There
is no additional borrowing base available at this time. At December 31, 2000 and
June 30, 2001, the Company was not in compliance with the current ratio or the
debt coverage ratio as defined in the credit agreement. The Company did not
receive a waiver of these covenants. However, the Company is, and consistently
has been, current on its loan payments.
In connection with the acquisition of the Marathon Properties, we entered
into a loan agreement with Equiva Trading Company under which we borrowed $1.7
million for a three-year term at 14% interest per annum. As security for this
loan we assigned to Equiva payments from Giant Refining Company for our
production from the Horseshoe Gallup and NE Hogback Unit. Equiva will remit to
us the amount due from Giant after deducting monthly principal and interest of
$58,893 plus ten cents per net revenue interest barrel.
The Company renegotiated a $2.5 million demand note with Parawon
Corporation in March 2001 to provide for interest only payments through April
30, 2001, at a rate of 18% for January 2001 and 12% from February 1, 2001
through April 30, 2001. As set forth in the note, because the note was not
repaid by May 1, 2001, the interest rate reverted to 18% and the Company must
pay the note in 35 monthly installments of $70,000 plus interest with a final
installment of the remaining balance of $50,000 in the 36th month. The note is
subordinate to the $6,000,000 note to Bank One, is partially collateralized by
the New Mexico properties, and is guaranteed by the Company's president.
The Company executed a promissory note effective March 1, 2001, in the
original principal amount of $800,000, payable in full on or before August 28,
2001 at an interest rate of 6% annually with monthly interest payments to begin
April 2, 2001. The note is for the benefit of Generation Capital Associates
("GCA"), and is personally guaranteed by John Ehrman. In conjunction with the
promissory note, the Company entered into collateral agreements which provide
for the following: (a) replacement of this note with convertible notes to be
issued to accredited investors in the same aggregate amount, (b) the issuance of
warrants for 360,000 shares as follows: (i) warrants for 200,000 shares to the
note holder(s), (ii) warrants for 80,000 shares to Bathgate McColley Capital
Group, LLC, the placement agent by GCA, (iii) warrants for 80,000 shares to GCA
for document preparation fees, (c) registration rights as to the warrants, the
convertible notes and the shares of common stock underlying the warrants and
convertible notes. The strike price of the warrants and the conversion price of
the notes is $1.50 per share (subject to reduction if the registration
statement, which has not yet been filed, is not filed by April 30, 2001). The
issuance of the warrants will give rise to a material charge to interest over
the term of the loan. The agreement provides that if the original promissory
note is not replaced by convertible notes by March 31, 2001 (which replacement
has not yet occurred) a 10% net profits interest in the properties that the
Company acquired from Marathon Oil Company ("NPI") is payable to GCA monthly
from March 1, 2001 until the original promissory note is replaced by the
$800,000 convertible notes or repaid.
Pursuant to the March 1, 2001 Letter Agreement, the Company, on July 24,
2001 issued 200,000 warrants at an exercise price of $1.50 per share to GCA or
its designee. The Company intends to repay the $800,000 loan from GCA on August
28, 2001 when it is due. The Company does not intend to use the financing
available under the Financing Terms Agreement. The Net Profits from the Marathon
properties are negative for the period March through August 2001, thus no
payment of net profits is due to GCA. It is the Company's position that no
further shares, warrants or compensation are owed under the March 1, 2001 Letter
Agreement or the Financing Terms Agreement.
13
In the second quarter, the Company issued $2,850,000 of convertible notes
(convertible to Regent common stock) due in 24 months at 6% to 9% per annum to
investors. The debt is convertible at $2.50 to $3.25 per share, however the
Company may force conversion when and if the Company's common stock price
averages $5.00 or more for more than sixty days. Additionally, 329,500 warrants
exercisable at $1.00 per share until April 15, 2004 were issued in connection
with the notes. To date 222,000 of these warrants have been exercised. The
issuance of these warrants gave rise to deferred charge of $991,871, of which
$93,072 was amortized in the second quarter of 2001.
The Company will need to spend approximately $1,158,021 during the third
quarter for principal payments of $867,280 and interest payments of
approximately $290,741 under currently existing debt. To date during the third
quarter, in addition to using cash flow from operations, the Company has been
using private convertible debt financing secured during the quarter (discussed
above) to make these payments. We estimate that in addition to funds needed for
capital expenditures on our properties (budgeted at $746,000 for the third
quarter and $1,130,000 for the fourth quarter), we will need approximately
$1,138,342 to pay $871,859 of principal and approximately $266,483 of interest
during the fourth quarter. We are actively pursuing our options to raise capital
through debt and/or equity to cover these payments. We are in continuing
negotiations with certain accredited investors with respect to a private
placements of equity, debt or a combination of both, although no such
arrangements have been finalized. We believe we will be successful in raising
the required capital and expect to have funds sufficient to cover our budgeted
capital expenditures through the third quarter in place by the end of the second
quarter of 2001. In addition, we are exploring the replacement of our Bank One
note in the original principal amount of $6 million and the $2.5 million Parawon
note described above with equity or convertible debt in the next several months.
INTEREST EXPENSE
Interest expense for the second quarter 2001 was $348,598 compared to
$112,063 for the second quarter 2000. This increase of $236,535 is due primarily
to financing activities related to borrowings for the Marathon acquisition.
Interest paid in the second quarter of 2001 was paid as follows: Bank One
$102,670; Equiva Trading Company $54,778; Parawon Corporation $138,699; accrued
interest on convertible debt $34,572; other $17,879. The interest paid in 2000
was primarily due to a previous loan from Parawon.
Interest expense for the first half of 2001 was $608,389 compared to
$146,838 for the first half of 2000. This increase of $461,551 is due primarily
to financing activities related to borrowings for the Marathon acquisition.
Interest paid in the first half of 2001 was paid as follows: Bank One $233,630;
Equiva Trading Company $107,382; Parawon Corporation $210,411; accrued interest
on convertible debt $34,572; other $22,394. The interest paid in 2000 was
primarily due to a previous loan from Parawon.
EBITDA
EBITDA decreased from $(746,833) in the second quarter 2000 to $(890,118)
in the second quarter 2001. The decrease of $(143,285) was due to higher general
and administrative expenses and higher lease operating expenses.
FORWARD LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements, as that
term is defined in Section 21E of the Securities and Exchange Act of 1934, as
amended, that involve a number of risks and uncertainties. Such forward-looking
statements may be or may concern, among other things, capital expenditures,
drilling activity, acquisition plans and proposals and dispositions, development
activities, cost savings, production efforts and volumes, hydrocarbon reserves,
hydrocarbon prices, liquidity, regulatory matters and competition. Such
forward-looking statements generally are accompanied by words such as plan,
estimate, budgeted, expect, predict, anticipate, projected, should, assume,
14
believe or other words that convey the uncertainty of future events or outcomes.
Such forward-looking information is based upon management's current plans,
expectations, estimates and assumptions and is subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: requirements
for capital, fluctuations of the prices received or demand for the Company's oil
and natural gas, the uncertainty of drilling results and reserve estimates,
operating hazards, acquisition risks, general economic conditions, competition
and government regulations, as well as the risks and uncertainties discussed in
this Quarterly Report, including, without limitation, the portions referenced
above, and the uncertainties set forth from time to time in the Company's other
public reports, filings and public statements.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
(a) None.
(b) None.
Since the period beginning April 1, 2001 through June 30, 2001, the
Company issued the following equity securities in transactions not
registered under the Securities Act of 1933, as amended (the "Act"):
On April 6, 2001, the Company issued 172,621 shares of its common stock,
par value $.001 per share, upon the exercise of warrants as follows: 168,355
shares at $.001 per share, 537 shares at $.30 per share, 3,729 shares at $1.00
per share.
On April 16, 2001, the Company issued 222,000 shares of its common stock,
par value $.001 per share, upon the exercise of warrants at $1.00 per share. The
Company relied on an exemption from registration under the Act provided by
Regulation S promulgated under the Act.
On June 15, 2001, the Company issued 7,458 shares of its common stock, par
value $.001 per share, upon the exercise of warrants at $.34 per share. The
Company relied on an exemption from registration under the Act provided by
Section 4(2) under the Act.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
The following exhibits are furnished in accordance with item 601 of Regulation
S-B.
10.1 Representation Agreement dated June 28, 2001 with BORS International
L.L.C.
10.2 Project Development Agreement dated August 7, 2001 with Millennium
Ventures, L.L.C.
10.3 Purchase and Sale Agreement dated August 10, 2001 with Henry
Production Company, Inc. relating to the Deep Lake Prospect in Cameron
Parish, Louisiana.
16
Reports on Form 8-K
1. The Company filed an amendment to the current report on Form 8-K with
the Securities and Exchange Commission on June 1, 2001 to report the
Financial Statements reflecting the exchange of shares pursuant to the
Agreement and Plan of Reorganization.
2. The Company filed an amendment to the current report on Form 8-K with
the Securities and Exchange Commission on June 5, 2001 to correct
certain financial information.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Quarterly Report to be signed on
its behalf by the undersigned thereunto duly authorized.
REGENT ENERGY CORPORATION
(Registrant)
Date: By: /s/ John N. Ehrman
August 14, 2001 ---------------------------------
John N. Ehrman, President and
Chief Executive Officer